The Apothecary, a blog about health care and entitlement reform, is edited by Avik Roy, a Senior Fellow at the Manhattan Institute for Policy Research and a former health-care policy adviser to Mitt Romney. Avik also writes a weekly column on politics and policy for National Review.
The other contributors to The Apothecary are: Josh Archambault, Director of Health Care Policy at the Pioneer Institute in Boston; Robert Book of the American Action Forum; Chris Conover, Research Scholar in the Center for Health Policy and Inequalities Research at Duke University and an Adjunct Scholar at the American Enterprise Institute; Nicole Fisher of the University of North Carolina; John R. Graham of the Advanced Medical Technology Association; and Jeet Guram of Harvard Medical School.

During the debate over Obamacare, Republicans have consistently promoted an alternative approach that involved allowing individuals to purchase health insurance across state lines. Interstate insurance purchasing was the second item in the health care section of the GOP’s 2010 “Pledge to America,” right after tort reform. It’s also a part of Mitt Romney’s plan to replace Obamacare. It makes intuitive sense: after all, we can buy most other things across state lines; why not health insurance? Credible skeptics, however, say that health insurance is different, and that interstate insurance won’t reduce costs. Let’s explore their arguments.

Right now, in nearly every state, insurance is regulated at the state level. If you live in New York, like I do, you can’t buy insurance from a company in Connecticut or New Jersey, or even better, Utah. Why does this matter? Because state governments, at the behest of lobbyists, enact insurance mandates requiring all plans in a state to cover, say, acupuncture or fertility treatments. Insurance mandates can raise the costs of premiums by 30-50 percent. If I could buy insurance from another state, where regulations are less onerous, I might not be forced to buy a policy that covers drug-abuse counseling.

State insurance mandates drive up premium costs

Even more onerous are the regulations in states like New York that have guaranteed-issue and community rating laws, without an individual mandate, such that young, healthy people are forced to pay far more for insurance than they should, leading many to drop out of the system. Again, I could buy a more affordable plan if I could buy insurance in a state that doesn’t have those mandates. “Allowing individuals and businesses to purchase coverage across state lines would create more competitive insurance markets,” notes Devon Herrick.

Liberals, in an interstate system, reflexively worry about a “race to the bottom” in which states who abandon “basic consumer protections” would attract the most insurance business. But no state has an interest in seeing its insurance business collapse. As Michael Cannon points out, consumers have an incentive to seek out states that carry protections that they view as cost-effective.

The real question, then, is whether or not interstate competition would reduce the cost of insurance. If it does, then it’s hard to understand why liberals would want to force people to buy less affordable insurance policies. “There is a lot to work with here,” says Sen. Ron Wyden (D., Ore.). Wyden would want interstate insurance to contain some basic federal consumer protections, but told the New York Times in 2010 that a compromise is possible.

The failure of Georgia’s interstate experiment

Within the health-wonk community, a recent article from the Atlanta Journal-Constitution has made waves, in which Carrie Teegardin reports that an experiment in interstate insurance competition doesn’t appear to be working.

In 2011, Georgia passed a law allowing people to buy insurance from out-of-state carriers. But not one out-of-state insurer has sought to do so. “Nobody has even asked to be approved to sell across state lines,” Georgia Insurance Commissioner Ralph Hudgens told Teegardin. “We’re dumbfounded. We’re absolutely dumbfounded.”

Rick Ungar, with typical bluster, crows that the policy was a “major bust.” But it’s hardly surprising that the Georgia experiment hasn’t gone anywhere. As the AJC article points out, nobody wants to make a major business investment in health insurance at a time when the entire regulatory landscape could be upended by the Supreme Court.

But it is a major business investment for an out-of-state carrier to provide in-state insurance. And those who favor interstate insurance should be aware that, if there ever were to be a national market for insurance, such a market wouldn’t appear overnight.

Building a provider network takes time and effort

Think about what it is that health insurance companies do: they contract with doctors, hospitals, and other providers to provide services to their policyholders for a negotiated price. Those negotiations can be laborious, and require a substantial investment of time and effort by an insurance company, not to mention costly filing fees.

If Georgians could buy Alabaman insurance policies, observes Bob Vineyard of InsureBlog, “the health insurance policies and rates would also have to be filed in [Georgia] and approved by the Department of Insurance. This is expensive and time consuming.”

Most importantly, it’s the biggest insurers in a state, with the most market power, who are in the best position to negotiate favorable rates with powerful hospitals. New entrants wouldn’t have that luxury. In other words, an Alabaman insurer might be able to offer a plan that’s 30 percent cheaper, because of fewer insurance mandates, but be forced to pay Georgian hospitals 30 percent more, because the Alabaman insurer didn’t have a large enough footprint in Georgia to negotiate better prices.

Interstate insurance will work, but the market will evolve gradually

But eventually, a national market would begin to take shape. Insurers would ultimately have an incentive to build these multi-state plans, because they would have larger risk pools, reducing the volatility of health-care spending, and reducing administrative costs. This will be especially important as more people buy insurance on their own, rather than through their employers: a major goal of market-oriented health reform.

In the many parts of the country where metropolitan areas border several states, insurers could build multi-state provider networks, increasing competition among hospitals and other providers—another crucial goal.

A group of prominent health economists at the University of Minnesota, including Stephen Parente and Roger Feldman, have projected that a national insurance market would increase health coverage by 49 percent in New Jersey and 22 percent in New York. “We find evidence of a significant opportunity,” they write, “to reduce the number of uninsured under a proposal to allow the purchase of insurance across state lines. The best scenario to reduce the uninsured, numerically, is competition among all 50 states with one clear winner. The most pragmatic scenario, with a good impact, is one winner in each regional market.”

Policymakers shouldn’t be “dumbfounded” if interstate insurance doesn’t produce immediate dividends. But if we’re fortunate enough to enact such reforms, and people are sufficiently patient, we should see results.

It’s unfortunate that Teegardin and Ungar used the Georgia law as a straw man to portray the entire policy idea of interstate insurance sales as a failure. Georgia’s law doesn’t even allow out of state insurers to sell in Georgia.

Instead, the law says insurers already licensed in Georgia can sell plans that they or their affiliates/subsidiaries already offer in other states—essentially it allows Georgia insurers to sell policies with fewer mandates. That these insurers would wait to see if the Supreme Court upholds federal insurance mandates is then somehow taken as proof that their straw man has been eviscerated.

Teegardin at least appears to understand the law and nonetheless chose a misleading title. Ungar, on the other hand, makes a convincing argument that he has no idea what the Georgia law even says.

My co-blogger John R. Graham has some thoughts on this topic, courtesy of a podcast with Ben Domenech and Brad Jackson of Coffee and Markets.

In an exchange between Richard Unger and Michael Cannon, Unger comes across as a general naysayer (offering no explanations of his own) but Cannon’s excuses seem weak: it’s administratively expensive for out-of-state insurance companies to enter the Georgia market, negotiate contracts, create new networks, etc. Here’s the problem: You don’t need out-of-state insurers to do this. In-state insurers (with contract and networks already in place) could in principle start selling insurance under some other state’s laws. Cannon also says that the uncertainty created by the Supreme Court ruling on ObamaCare and the general uncertainty about the implementation of ObamaCare are the culprits – an argument also endorsed by Avik Roy.

Okay, but how hard could it be to file and start selling a new type of insurance for companies already in the trade? After all, they’ve got to sell something.

I’m not convinced we have the right explanation here.

UPDATE 3: Sarah Kliff discusses a new paper out of Georgetown that contemplates recent interstate-insurance reforms in Maine, Georgia, and Wyoming. The paper highlights the challenges of building a new provider network, says Sarah:

So far, none of the three have seen out-of-state carriers come into their market or express interest in doing so. It seems to have nothing to do with state benefit mandates, and everything to do with the big challenge of setting up a network of providers that new subscribers could see.

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I don’t know much about the history of the health care industry in the US. However, in a free market economy like the US, it does not make any sense to prevent consumers from buying health insurance (or for that matter anything else) anywhere they please.

Avik as usual the experts are missing the real point, regardless of the legal, state and other challenges.

The savings will come in the form of reduced administration costs. Right now companies like BCBS or United and such are forced to actually have a separate companies, one in each state they operate in. This requires each company to have redundant infrastructure from C-Level management all the way down to the people who answer the phones. In many cases we are talking about fifty of these, all with a CEO, sales people, customer service people, claim processing people and so on. This goes away if allowed to compete or sell across state lines, these companies can consolidate operations and run a much more efficient operation, with considerably less overhead, that should equate to lower premiums.

Now let us not forget some of the stumbling blocks to get this done are driven by those states wanting both the power and the tax base, so there is much resistance to this from many areas.

But regarding insurance, as part of opening the competition a better operational plan in my opinion would be to standardize all claim processing, (all do it differently now), create a national clearing house that all insurance companies process through, share the labor and processing costs. And in the end it could be self funding as we could charge the provider a transaction fee to send a claim and a payer a transaction fee to process and pay the claim. Happy to give more detail.

On another note, I am in the process of polling health care professionals on LinkedIn, and have asked them to set politics aside and list the top five things they would want to see in reform. The goal is to compile the data and determine the things that most could agree on so we can get real reform under way. So far the response has been huge and from a wide cross section of stakeholders in health care from insurance execs, to pharma, doctors nurses, vendors and patients as well as everything in between, are all chiming in and there are common threads.

I will provide the results when completed for you to publish if you so desire.

If I may offer one more point. The cost of health care has been driven up at record rates for reasons many do not want to talk about and ACA did not even address.

HMO plans were mandated two generations ago, which shifted the health insurance industry from a catastrophic loss prevention product to a maintenance product. The grand intention was to provide routine and preventive care to all patients to make them healthier, well it failed to accomplish the stated intention but it did drive up the consumption of health care, and thus demand. Let me explain it this way.

If your auto insurance company was told they had to cover tune ups, brakes and tires as part of the insurance, premiums would sky rocket, consumption of these items would soar and the cost of each would rise substantially as well.

Why because a third party is paying the bill and this is exactly what is happening in health care. The consumer (patient) has no concept of the cost to consume the service because either the government or the insurance company is paying most of the bill. And this is the single biggest catalyst to cost increases over the last twenty years.

An example, if you have a cut and need stitches, most now go to the ED (emergency room), at a cost 500% more than going to your doctor or even an urgent care facility. Now if the patient was paying that bill out of pocket you can bet they would go to the lower cost facility, but they aren’t and so they consume the $3,500 suture instead of the $500 procedure. Someone else is paying the bill. What is not recognized is that this adds to the over all cost of the insurance and the delivery of the care.

So insurance needs to go back to being loss prevention and not maintenance.

And providers need to stop contracting with payers and taking reduced reimbursements as a result of a contract with a provider so they don’t have to inflate the price of procedures to offset the discounts paid by insurance companies. If there is not HMO or preferred network there is no need to contract with a payer. Prices would come down as a result

If you ever want me to elaborate on these things and more I have become quite knowledgeable as I work with these providers and facilities on a daily basis nationally.

The dynamic of companies competing with one another is held up as the golden free market elixir which will set all problems straight. In the discussion of free markets in health insurance, however, one glaring fact is always glossed over. And by that I mean “ignored.”

In true free markets the consumer always has the trump card. We can choose NOT to buy a product any time we want. This will never be the case with health insurance. We all need it. I do not believe that without this consumer force the health insurance markets will ever straighten themselves out. Competition among themselves isn’t enough.

The imbalance of free market forces is putting great strain on a nation trying to provide healthcare to its workforce.

Also, when insurance companies pay claims, they call it a “medical loss.” So the less claims they pay, the better for the bottom line and shareholders. Very often insured consumers are in a battle with an insurance Goliath to get their claims paid.

In my work, I interviewed a 27 year old stroke victim. Her words. “The stroke was easy. That was nothing. Health insurance and billing were tough. It’s an industry with no controls. Where is the responsibility for the product?”

We’ve got a nation to insure if we are going to compete globally. Does our population even realize that we are the ONLY first-world nation with medical bankruptcies? Crazy.

When I need food, I go out and buy it! When I need clothing, I go out and buy it! When I need shelter, I go out and buy it or rent it! When you choose not to buy food, clothing or shelter, who will you blame?

All of the above are necessities. as is health insurance. But you intimate that only the health insurance vendors cannot succumb to competition! Please submit a basis for your claim.

Processing of many health insurance claims can be lengthy. Every little item which is claimed must be scrutinized. Also, many statements for service are not submitted to the insurance companies in a timely manner.

Bottom line! When you go to buy an automobile, do you pay the sticker price or do you negotiate with the salesman? The lower you get the price, the “bottom line will be” for the “shareholder”! You!

I’m sure the 27-year-old stroke victim truthfully shared with you all of the in’s and out’s of her situation. With all of her info and all of the info the insurance conveyed to you, you came to a very well-informed decision.

We, you’ve joined the ranks of the majority of the people of the U.S.A. It’s the new America: When all else fails, blame someone else.

I believe “cross-state” buying of insurance is an idea whose time has come. Not because it will reduce the cost of medical care, but because it can reduce the cost of medical insurance.

Yes, the much larger, underlying problem is the cost of medical care; yes, the idea of cross-state purchase of insurance does nothing about this underlying cost; and yes, provider reimbursements that an insurer has negotiated in one state wouldn’t apply in another state.

However, it’s also true that current law distorts the insurance markets. States can set their own, independent benefit mandates and states can prohibit their citizens from buying policies that have fewer mandates and are therefore less expensive; that is, they are prohibited from shopping “across state lines.” As a result, some people are obliged to pay more than they need to pay for the insurance they want.

The federal government recently argued before the Supreme Court that insurance is interstate business governed by the Commerce Clause. In fact the Supreme Court reached this very same position in the 1940’s. Why then can the states continue to prohibit their residents from purchasing an insurance policy that has been approved for issue in another state? State prohibitions clearly interfere with the interstate business of insurance. Isn’t it time to modify or repeal McCarran-Ferguson?

You and I can buy thousands of products – even fertilizer – from vendors in states where we don’t live. Why not insurance?

Clearly, it would be far simpler if the states allowed individuals a few simple choices: for example, a policy with all the mandates, or with none. But the states won’t enact this simple change – they are still enacting mandates.

Just to be clear, I don’t envision this particular insurance reform would reduce the cost of medical care by a nickel. But it can, I think, reduce the cost of medical insurance for many people – and that’s why it’s worth thinking about.

Georgia does not allow for cross state selling of individual insurance policies. They allow a one-way street only. Policies approved in other states can be sold in Georgia, but Georgia policies cannot be sold elsewhere. There is little savings from such a law and it is no surprise that it is ineffective. However, Georgia is now prepared to go the next step and lead a coalition of states to allow recipricity through a new multi-state approval process where states unify administratrive and coverage mandates. As an actuary who developed and filed individual products, it takes years and millions of dollars to get a product approved national by going state by state. Georgia now has the high moral ground in approaching other states. We already say, we will accept your policies, now let’s work together to simplify an anachronic sytem of policy approvals that require individual state mandates, agent training, policy applications, computer issue differences, and marketing materials. States can simplify, organize and create solutions without federal government meddling.

“If you live in New York, like I do, you can’t buy insurance from a company in Connecticut or New Jersey, or even better, Utah.”

This entire premise is a lie. There are thousands of health insurers in America and most of them sell policies in most states. And as the article implies, no insurance company will sell a Utah policy to a New Yorker but the simple reason is that everything is more expensive here in NY.

The only way to manage this would be to transfer regulation of the insurance markets to the federal government. This makes perfect sense, as after all it IS interstate commerce. So why are the Republicans all opposing such? Why do they want the Supreme Court to overturn the entirety of the Affordable Care Act, which for the first time sets up regulations on the federal level?

Charlie says “This entire premise is a lie. There are thousands of health insurers in America and most of them sell policies in most states. And as the article implies, no insurance company will sell a Utah policy to a New Yorker but the simple reason is that everything is more expensive here in NY.”

Charlie, you’ve managed to show that you don’t understand the issue.

Yes, insurance companies sell in most state, but that is not the “cross-state” issue. The issue is that one cannot buy the same policy in each state. One can only buy a policy that is approved by the state of issue – which means it must include all of that state’s benefit mandates – or it cannot be sold.

The insurance sold in states with more mandates – like Connecticut with 67 of them – is more expensive than it would be in Connecticut, if fewer mandates were required. But I cannot buy a policy with fewer mandates. I would like to buy an Alabama-approved policy that has fewer than 20 mandates – but I can’t. Connecticut will not allow that policy to be sold in Connecticut.

Get it now?

Your comment about “more expensive here in NY” also shows you don’t understand this. The task is not to make NY insurance less expensive than, say, Alabama. No one is even suggesting that. No – the issue is making insurance less expensive for New Yorkers. That can be done by allowing New Yorkers to purchase a policy that does not include all the NY mandates.

It’s simple, really. It’s not hard for people to understand.

However, it’s apparently impossible for people who are determined not to understand it.

But the poster’s logic still holds. Selling across state lines would require the federal government to overrule the state in order to make this happen. This is a simple concept. It’s similar to how a gay couple can get married in one state but another state does not have to recognize it. The only way to force that state to accept the gay couple’s marriage is for the federal government to mandate it.

He’s pointing out the hypocrisy in calling for the repeal of one federal mandate to be replaced by another federal mandate.